Six and a half years removed from the Great Recession, we’re now in the midst of the “Great Repricing.”
That’s what David Rosenberg, chief economist and strategist for Gluskin Sheff + Associates, dubbed the current market selloff, one that’s seen the Standard & Poor’s 500-stock index drop more than 11 percent since the new year began. Continued carnage in crude and flows to the yen, commonly considered a safe-haven currency, are signs of a market in which risk appetite is nowhere to be found.
These down markets nevertheless come at a time when the American consumer—the prophesied catalyst of global growth—still appears to be in good shape.
“Adidas just posted double-digit gains in operating profits and revenues, raised its outlook for earnings and sales for the year, and investors are putting their footwear to work and running away from risk,” quipped Rosenberg. Uncertainty isn’t confined to market participants, he said—it also reigns supreme at central banks.
“If [Janet Yellen] is so confused, why shouldn’t the rest of us be?” wrote Rosenberg, commenting on the Fed Chair’s testimony before the House Financial Services Committee. “And the blowout in credit spreads and sharp compression in the market multiple attests to an investor base that indeed is very confused at the moment.”
Since the financial crisis (or going back to the early 1980s, depending on whom you ask), selloffs of this severity typically have forced monetary policymakers to refill the punch bowl, creating the appearance of a central bank “put.”
Central bankers outside the U.S. have certainly attempted to bolster their economies. Recent attempts at accommodation have disappointed, however, judging by price action in Sweden on Thursday morning, or in the Japanese yen since the adoption of negative interest rates. Such developments suggest that market participants doubt the efficacy of monetary policy, as well as the possibility of global reflation.
If this market malaise is to be broken, central banks will have to try something bold, according to Rosenberg, and negative interest rates are not the answer. Put another way, gravitational waves aren't the only things proving Albert Einstein right today.
“This is no longer 2009-14 when central banks could bolster markets … the laws of diminishing returns have clearly set in,” he wrote. “The latest experiment on negative rates is falling flat on its face, but in a classic case of following Albert Einstein’s definition of insanity, the academics who run the world’s central banks show no sign of backing away from a policy that is undermining the banking system.”
Instead, the strategist would prefer monetary policy to join forces with fiscal policy.
“We need an entirely new strategy which would involve true debt monetization,” he said, suggesting the sort of “helicopter drop” of money previously bandied about by the likes of Ben Bernanke and Milton Friedman.